About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, defined by Warren Buffett as “the best investment book ever written”
With inflation raging and the Federal Reserve once again raising interest rates last week, there is one investment avenue that still remains intact – the US Treasury’s inflation-protected bonds.
When since the beginning of 2022 stocks have fallen 14%, bonds have lost 8%, and gold and bitcoin, which are often presented as a hedge against inflation, have fallen 4% and 48% respectively, the protected bonds – called I bonds (originally I BONDS) – yield an annual return of 9.6% until the end of October.
In my opinion, this is one of the most attractive investments out there, at least as long as the cost of living continues to climb at the rate it is at today. Where else can you earn almost 10% backed by a promise from the US government that you won’t lose money?
State and local income taxes are not required to be paid on I bonds. It is allowed to defer payment of federal income tax on profits from them until they are redeemed, or until they mature within 30 years – whichever comes first.
The yield of these bonds changes every 6 months – the next time on November 1 – in order to keep up with inflation as reflected in the consumer price index.
Since I started writing about I Bonds last year, I have received hundreds of questions from readers. Below are answers to some of the most frequently asked questions.
Why get excited about an investment that promises to return 0% after calculating inflation?
Although stocks and some other asset classes may beat inflation in the long run, in the short term they have performed terribly. I bonds do not show performance that bypasses the cost of living, but it is guaranteed that their return will be in line with the cost of living. Investing is not only a matter of increasing the value of capital – capital preservation is a goal in itself.
What’s the catch?
You can’t buy more than $10,000 of I bonds in a particular account each year through the TreasuryDirect.gov website. Wealthier investors might think that’s too small to be worth the headache.
Bonds I must be held for a minimum period of at least one year, except in cases of financial hardship that must be proven. If the bonds are redeemed in a period of less than five years, we are penalized by waiving three months of interest.
I-bonds are not available in tax-sheltered savings accounts, such as individual retirement accounts, 401(k) or Roth retirement accounts. Also, brokers or financial advisors may not purchase them on your behalf.
To purchase I-bonds, one must go to the antiquated TreasuryDirect website, which sometimes locks users out or rejects purchases when the buyer’s identity information is out of date. This can lead to what my colleague Andrea Fuller and I call “a week of red tape,” and sometimes requires filling out an antiquated form called a 5444.
If you pass away and your heirs don’t know the TreasuryDirect account number and password, they may have a hard time getting to your I bonds, assuming they even know the account exists. Keep the username and password in a physical or digital safe, and make sure you designate beneficiaries on your account.
Is it possible to bypass the $10,000 annual limit?
Yes and no.
This cap applies to every account that has a tax identification number, not every person. You can give I bonds as a gift of up to $10,000 a year. You can also purchase up to $10,000 in these bonds each year in a trust account or in the account of a corporation, partnership or business that you own or manage.
A reader of the Journal told me, for example, that he will invest $100,000 in I bonds next year, in increments of $10,000, on behalf of five members of his family, as well as with trust and business accounts (this year he invested $90,000).
I bonds are intended for small savers; they can be bought even with an initial amount of $25. So if you accumulate them too aggressively, the Ministry of Finance may close your account. This is in case the ministry suspects that you are trying to “circumvent the purpose of the sold bond program and the rules applied to them,” explained the ministry’s spokesman, John Rizzo.
However, it is possible to buy up to an additional $5,000 a year in paper I bonds with the help of federal tax returns by filling out IRS Form 8888. If you make federal income tax payments on your assessment each quarter, consider paying more on purpose, Then receive up to $5,000 of the refund you are due in the form of a paper I bond (the amount should be a multiple of $50). Then you can convert the paper to the electronic type.
How do you get approval for form 5444?
Many banks no longer provide one of the requirements of this form, the so-called medallion seal. However, the Ministry of Finance will also accept other types of bank verification, including a “paid savings bond” stamp or a signature or promise from the bank to support the customer. Recently, the Ministry of Finance also began to accept notary certificates.
Do not give up because many bank employees do not know the requirements, they will help you if you insist.
Where is my income on the interest?
Some readers were concerned that they were not receiving interest on their I-bonds, since TreasuryDirect reported no change in their account value.
Because redemption in the first five years leads to three months of interest being waived, the government doesn’t raise interest on TreasuryDirect accounts until you’ve held the I bonds for four months from the date they were issued. Interest payments start accruing in the fourth month, but won’t show up in your account until the fifth month.
So if you bought an I bond in April, the interest you earned will not appear on the website until August 1st (look at the “existing holdings” tag).
I am a passionate believer in I bonds, and I think you should too. They are a bit problematic, but so are most investments that have great upside.